In the first quarter of 2009, President Obama pushed his massive fiscal stimulus package of $862 (It was originally at $787 billion) through the Congress and later passed by the House and the Senate, whose centerpiece was spending most of this stimulus funds in repairing and building infrastructure in transportation, healthcare, science and technology, and education. Obama also urged to make a modest tax cut for middle-income families making a household income less than $250K per year. The push for this combined package of spending and partial tax cut was also criticized by several opponents in politics, academia, and businesses on the ground that the spending was too large under government financing to balance the growing budget deficit and debt that might threaten future economic stability of the country.
B) Why do you think the critics were so much concerned that this stimulus package might be bad economic policy, and not just for the US, but for the world economy? Does it sound to have a trickle down adverse effect in the current or future financial stability in the US and the World economy, say later in 2011? Do you think this issue is also related to the current political rhetoric between the GOP and Democrats on raising the debt ceiling over $16 trillion? (New debt ceiling proposed by Pres. Obama on Jan 12, 2012: http://www.foxnews.com/politics/2012/01/12/obama-r...
d) Using the Keynesian Cross model diagram (The diagram with 45 degree line by splitting AD (C+I+G+NX) on the vertical axis and RGDP on the horizontal axis, See in Ch. 9,10 & 13 of the textbook) and equation, critically and briefly illustrate the short run and long run economic impact of Obama’s stimulus package of $862 billion. (Hint: The impact will be in terms of major macroeconomic variables of US economy such as GDP growth, unemployment rate, interest rates, and inflation.)
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A. Economist like Krugman sees that the economy was deeply gone into recession. The economy was at risk to have the Japan's syndrome called liquidity trap which would be very hard to get out.Based on the Keynesian model, it should not use the austerity program like in Europe,but government spending. He sees that the package is still too little.There is nothing to worry about the budget deficit, but the life of American citizens who lost jobs.The budget deficit will cure itself when the economy picks up.That is a real argument.
B. The stimulus package has not been financed by government borrowing from the public, but the FED called QE1 and QE2. As the domestic banking system was not in the position to give more loans due to high risk,the new money went to find new niche in foreign countries,especially in Asia. That caused most of currencies in the region to appreciate,except the Yuan which pegged to the US dollar. The situation is terminated when QE2 has come to an end with the inflation of 3.7%. Apparently,QE1 and QE2 could not save the Euro zone.
C. The actual GDP is still behind the potential GDP since the unemployment rate is still high (8.7%). It is still a recessionary gap. To move the actual GDP upward to the potential GDP and reduce the unemployment rate to 5%(natural rate), it has to increase more government spending and cut taxes.The spending multiplier and tax multiplier will save the economy.
have a nice day.
The problem with economics is, its rules have no proof.
Keyenes attained fame in the thirties because his model worked wonders for USA.
Referring to your textbook logic....what we have to do is scrutinize in the present context.
1. he mentions RGDP ie ex-inflation, and who bothers about RGDP now a days ?
2. FDR injected stimulii by creating government works/jobs with responsibility.whereas
Obama has just thrown away the money which the industry could not use properly
the reason they fool everyone that GDP matters and not RGDP, so infectious liquidity raised inflation.....so, RGDP not up.
3. Sorry state of affairs is that culprits of crash have rich resources to brainwash us with wrong interpretation of economic theories.
4. State has become weak and brokers/bankers have taken the control, so not expect any miracle with money thrown to industry unless they are committed to increase market competence and show real GDP grown out of real OUTPUT.